Integra(ng)Risk)Management)

into)Strategy)&)Corp)Governance)
Peter%Verhezen%
Principal)Verhezen)&)Associates))
Fellow)Harvard)Kennedy)School)
Adjunct)Professor)Melbourne)Business)School)
)
)
This)slide)presenta(on)has)been)prepared)for)and)in)collabora(on)with)
Pri)Notowidigdo)

Risk = effect of uncertainty on

objectives
Scenarios / Probabilities

Positive
deviation

Opportunities
Upside

Risk has a positive side

Future:
probabilities

Target
Negative deviation from target
Downside

Negative
deviation
Todays
Value
(mark-to-market)

Threats
As management projects into the future, the value
of the firm will be affected by many different market
and business variables i.e. risk factors.

Tomorrows
Possible
Values
(mark-to-future)
2

Mortgage Crisis => Global Financ Crisis

hKp://www.youtube.com/watch?v=KaqvwOJx2eQ)
Scenarios / Probabilities
)
Opportunities

Positive
deviation

Upside

Risk has a positive side

Risk Appetite

Future:
probabilities

Target

But usually perceived as negative

Downside

Negative
deviation

Threats
Todays
Value
(mark-to-market)

As management projects into the future, the value

of the firm will be affected by many different market
and business variables i.e. risk factors.

Tomorrows
Possible
Values
(mark-to-future)
3

Within boundaries & above average

High Moral &
Social Norms /
Higher than
Average Value
+

+ Risk

Opportunity

Value at Risk (1)

)
)

Innovative Strategies

Enrich
Shareholders
& Serve
Stakeholders

Best"GCG"

Probability

"

Volatility (2) = proxy for uncertainty

Risk Management

Inferior Moral &

Social Norms /
Lower than
Average Value

- Risk

Regret (3)
4

Impact
Within boundaries & above average
Higher than
Average Value

+ Risk

Opportunity

Value at Risk (1)

)
)

Innovative Strategies

Enrich
Shareholders
& Serve
Stakeholders

Probability

"

Volatility (2) = proxy for uncertainty

Risk Management

Lower than
Average Value

- Risk

Regret (3)
5

Upside Opportunity

+ Risk

"

[Sustainable]Value"Crea4on:"

!Fairness(as(a(general(principle(to(all(
!Accountability(to(highest(standards(
!Transparency(=(Disclosure((&(
Independency(of(Board(members(as(an(
a>tude(based(on(Integrity(
!Responsibility(as((doing(well(by(doing(
good,(eecDvely(

)
Risk(as(a(RegreNable(Decision(
)

Narratives

Attitude of Integrity:
Spirit of the law
Moral & Social Responsibility

Benchmark

Best Corp Governance Practices

Creation of
Shareholder Value
&
Serving Stakeholders

Probability

"

Value"Preserva4on:(
!Transparency:(Disclosure(according(to(
GAAP(&(Independency(of(B(members(as(
in(monitoring(&(controlling(
!Fairness:(Best(CEO(paid(according(to(
Performance(
!Accountability:(min(standards(
!Responsibility:(CSR(as(Insurance(
Policy(

Legal & Economic Accountability

Compliance
Letter of the Law

Transparency,)
Equal)rights))
Accountability,))
Responsibility,))
Fairness)

- Risk
Downside Regret

+ Risk

Upside Opportunity

Boards enabling

"
[Sustainable]Value"Crea4on:"
+

!Independency(of(Board(members(as(an(
a>tude(based(on(Integrity(
!CSR(as((doing(well(by(doing(good,(
eecDvely(

Build Accountability
& Trust

Creation of
Shareholder Value
&
Serving Stakeholders
"
Value"Preserva4on:(

!Independency(of(B(members(as(in(
monitoring(&(controlling(
!CSR(as(Insurance(Policy(

-(

- Risk

Legal Accountability

Based on clear & communicated

(1)Vision & Values statement that
underpin a creative Sustainable
Value Proposition
(2)Systemic thinking
Setting Direction
Creating Alignment
Maintaining Commitment

Boards prevention
(1)Explicit Risk Manifesto

Pernicious
Pathology of
CEOs

Downside Regret

Regret Analysis Risk Apprentite

To define basic principles in line with risk

appetite

(2)Talent driven Risk Scenarios

Risk oversight, professional development that

present high impact financial Black Swans
(currency collapse; run on fin instruments; geopolitical
& demographics changes; disruptive technologies;
constricting regulations)

(3)Wisdom of crowds

Tapping the wisdom of investors

Better shareholder outreach

Opportunity

Grace
Legacy
= leaving beautiful traces behind

Legi4macy"

=(compliance(to(the(spirit(of(the(law(

"

Enrich
Shareholders
& Serve
Stakeholders

Best)GCG)

Legality""

=(compliance(to(the(leNer(of(the(law(

Illegality

Regret

Disgrace
Published)in)awarding)winning)paper:)Verhezen,)P.,)(2010),)Giving)Voice)in)a)Culture)of)
Silence,)Journal)of)Business)Ethics,)Vol.)96)(2):)187c206))